Outcome Based Contracting: An Effective Approach to Achieving Cost Competitiveness in Well Construction Projects

Abstract

In the last decade, the volatility in the price of oil and gas have caused the industry to seek innovative ways of delivering profitable projects. This has been further challenged by safety and security risks and other considerations such as societal and political demands for an accelerated transition to a net-zero energy system. These complexities increasingly challenge energy companies to find ways of delivering projects within acceptable Value Investment Ratio (VIR), thus requiring that all components of the capital and operating expenditure are cost efficient. According to EIA 2016 report, drilling and completions cost (including tangible and intangible costs) account for 60 – 80% of the total well cost across the onshore and offshore plays. Most well projects in onshore and shallow offshore fields in Nigeria are in remote and challenging environments with most equipment sourced abroad. Therefore, deploying innovative approaches to managing supply chain risks and aligning these with the overarching business objective is critical to achieving the desired value for both the operator and supplier. This paper describes how the Operator developed its Outcome Based Contracting (OBC) model for Drilling and Completions Services as a fundamental lever in its Supply Chain transformation journey; highlighting the technical and commercial value realised in terms of capital efficiency and cost competitiveness both to the operator and supplier. OBC is a contracting model where the Operator pays the supplier for the outcome agreed and not the activities leading to the outcome. This approach inherently drives competitiveness as both parties partner to provide enablers in project scoping, technology and innovation as well as related supply chain strategies towards realistic and achievable outcomes. It is expected that this will contribute to the body of knowledge and adopted by other operators to improve their contracting process for maximum benefits to all parties.